GOLD is the﻿ money of the KINGS, SILVER is the money of the GENTLEMEN, BARTER is the money of the PEASANTS, but DEBT is the money of the SLAVES!!!

Sunday, August 3, 2014

Why Is the Stock Market So Unstable? Finance, Money, and Crashes in History

In finance, Black Monday refers to Monday, October 19, 1987, when stock
markets around the world crashed, shedding a huge value in a very short
time. The crash began in Hong Kong and spread west to Europe, hitting
the United States after other markets had already declined by a
significant margin. The Dow Jones Industrial Average (DJIA) dropped by
508 points to 1738.74 (22.61%).

In Australia and New Zealand the
1987 crash is also referred to as Black Tuesday because of the timezone
difference. The terms Black Monday and Black Tuesday are also applied to
October 28 and 29, 1929, which occurred after Black Thursday on October
24, which started the Stock Market Crash of 1929.

Possible causes for the decline included program trading, overvaluation, illiquidity, and market psychology.

A
popular explanation for the 1987 crash was selling by program traders,
most notably as a reaction to the computerized selling required by
portfolio insurance hedges.[10] However, economist Dean Furbush points
out that the biggest price drops occurred when trading volume was light.
In program trading, computers perform rapid stock executions based on
external inputs, such as the price of related securities. Common
strategies implemented by program trading involve an attempt to engage
in arbitrage and portfolio insurance strategies. As computer technology
became more available, the use of program trading grew dramatically
within Wall Street firms. After the crash, many blamed program trading
strategies for blindly selling stocks as markets fell, exacerbating the
decline. Some economists theorized the speculative boom leading up to
October was caused by program trading, and that the crash was merely a
return to normalcy. Either way, program trading ended up taking the
majority of the blame in the public eye for the 1987 stock market crash.
U.S. Congressman Edward J. Markey, who had been warning about the
possibility of a crash, stated that "Program trading was the principal
cause."

New York University's Richard Sylla divides the causes
into macroeconomic and internal reasons. Macroeconomic causes included
international disputes about foreign exchange and interest rates, and
fears about inflation. The internal reasons included innovations
with index futures and portfolio insurance. I've seen accounts that
maybe roughly half the trading on that day was a small number of
institutions with portfolio insurance. Big guys were dumping their
stock. Also, the futures market in Chicago was even lower than the stock
market, and people tried to arbitrage that. The proper strategy was to
buy futures in Chicago and sell in the New York cash market. It made it
hard -- the portfolio insurance people were also trying to sell their
stock at the same time.

Economist Richard Roll believes the
international nature of the stock market decline contradicts the
argument that program trading was to blame. Program trading strategies
were used primarily in the United States, Roll writes. Markets where
program trading was not prevalent, such as Australia and Hong Kong,
would not have declined as well, if program trading was the cause. These
markets might have been reacting to excessive program trading in the
United States, but Roll indicates otherwise. The crash began on October
19 in Hong Kong, spread west to Europe, and hit the United States only
after Hong Kong and other markets had already declined by a significant
margin.

Another common theory states that the crash was a result
of a dispute in monetary policy between the G7 industrialized nations,
in which the United States, wanting to prop up the dollar and restrict
inflation, tightened policy faster than the Europeans. U.S. pressure on
Germany to change its monetary policy was one of the factors that
unnerved investors in the run-up to the crash. The crash, in this view,
was caused when the dollar-backed Hong Kong stock exchange collapsed,
and this caused a crisis in confidence.

Some technical analysts
claim that the cause was the collapse of the US and European bond
markets, which caused interest-sensitive stock groups like savings &
loans and money center banks to plunge as well. This is a well
documented inter-market relationship: turns in bond markets affect
interest-rate-sensitive stocks, which in turn lead the general stock
market turns.